“In light of the findings delivered in the final report, there are lessons to be learned for the U.K.’s construction and facilities management sectors. Companies should strive to adopt more transparent accounting practices, particularly with respect to their use of reverse factoring (supply chain finance). This will be critical to ensuring that the market receives a fairer representation of a company’s health through financial statements. A further challenge comes from the subjective nature of revenue and profit recognition in long-term construction contract accounting.”

“Though companies are not always required to disclose their use of reverse factoring, it is important to note that reporting of such arrangements is paramount when their impact is material. We believe that Carillion's financial adjusted debt –to reflect its extensive use of reverse factoring – would have been significantly higher than its financial statements had suggested.”

“Under S&P Global Ratings’ criteria, poor management and governance practices are among leading causes of weakened creditworthiness. Although we did not rate Carillion, today’s report suggests that the most significant contributors to Carillion’s demise were its poor risk management practices, such as aggressive bidding. We believe these practices led to major construction project impairments and a decrease in its operating margins. Further pressure came from Carillion’s extensive use of the U.K. Government's supply chain finance (SCF) scheme as both a source of financing and an early payment facility. This kept the company’s fragile financial situation hidden for longer.”

About Mar Beltran

Mar Beltran is the senior director and Infrastructure sector lead for the Europe, Middle East and Africa (EMEA) region, with Standard and Poor Global Ratings.